Everyone knows that they will have to pay for a product or service at some point, it's just a question of how much. Recently, however, it has become noticable that customers are proving to be tougher negotiators, both B2C and B2B. When it comes to selling, pricing is much more involved than just sticking some numbers on your goods and hoping for the best.
Accurate pricing is by far the most important profit lever, but most companies hugely underestimate its impact. While price pressure and price wars are placing the world economy under increasing pressure, companies are less and less able to achieve the prices they need to be competitive in the future.
A Global Pricing Study in 2014 of 1,600 executives and managers from over 40 countries revealed that most companies fail to successfully position their new products in the market and meet their price targets. About 72 percent of all new products flop, which puts a company’s profitability at risk.
Pricing needs to be the top priority of the innovation process because:
Price is the only element of the marketing mix that directly affects revenue.
All other variables, such as advertising, distribution, packaging, product development and sales promotion, generate costs.
Pricing depends as much upon good judgement as on precise calculation. It should reflect an in-depth knowledge of your customer's expectations and your competitors' abilities to meet them.
Customers do not last a lifetime - you have to work harder to get and keep their loyalty with an open and fair pricing policy.
12 Best Practices
The market place goalposts are constantly changing - failure to observe movements in the principal drivers will lead to incorrect pricing decisions. In order to negotiate the highs and lows of your market, try the following pricing strategies:
1. Decoy Effect
The decoy effect is a phenomenon where consumers change preference for one of two items when a third is introduced.
Decoy pricing works best when you have limited products or services and are trying to steer your customers towards the one with the higher price. The way you do this is by introducing an additional option, but with less value than the higher priced one and a cost that is almost the same. The idea is that your customers will see this new option compared to the one you hope they pick and say to themselves "for only x£ more I can have more value!" and then choose accordingly.
Apple is perhaps the most famous for using decoy pricing to ‘nudge’ their customers towards a purchase, but the practice is used in many industries.
2. 'Centre Stage' Effect
As the name implies, the Centre Stage Effect is the belief that consumers will prefer the middle product when presented with a line of items. Multiple studies have shown this to be the case regardless of the number of items and even when the items are identical. To capitalize on this, companies often opt to put their most expensive product in the middle instead of listing them in the order of price.
3. Framing Effect
The framing effect is an example of cognitive bias, in which people react to a particular choice in different ways depending on how the information is presented. Framing is a way to describe or label a product in order to get customers to focus on the value instead of the price. The most popular way to achieve this is by highlighting how much a customer will save to offset the difference in price between products.
4. Bandwagon Effect
This is a psychological phenomenon whereby people do something primarily because other people are doing it, regardless of their own beliefs. The easiest was to achieve this effect is by telling customers what the most popular option is or by showing them how many other people have chosen a certain item or service. Your customers don't want to feel left out or left behind!!
5. Anchoring Effect
This describes the common human tendency to rely too heavily on the first piece of information offered (the "anchor") when making decisions. Your customers will use this information as a point of reference throughout their purchase process and compare other figures against it to determine value. For example, if your friend bought a computer and told you it cost £500 but when you visit a shop and see a price of £450, you already perceive this as a good deal .
To take advantage of this bias, companies can list their products highest to lowest in terms of price so that anything after the first item is perceived as a better deal.
6. Base Rate Neglect
Even though common sense or experience might dictate what an item should cost, stores can bypass this expectation by creating and maintaining a higher price range - as long as they are consistent. For example, most people (and retailers) would probably agree that a t-shirt should cost anything from £10 - £40. However, if you visit a designer store, you will be met with a significantly higher price range.
Seeing consistent higher prices overrides previous expectations and creates base rate neglect, causing consumers to accept these higher prices. Consistency is key here as any price that is significantly lower will reintroduce the base rate and cause customers to potentially re-evaluate the item's value.
7. Segmented Pricing
Price segmentation refers to the practice of offering the same product at different price points irrespective of the cost of production and distribution.
Segmentation allows you to charge different prices based on customer, location, marketing channel, or any other variable that might influence a sale. Used correctly, this practice should allow you to capture more of the market. The most well-known industries for engaging in price segmentation are probably airlines and hotels, both of which change their prices based on the season, time left until check-in, and even the site or vendor used to complete the purchase.
8. Peak Pricing
Peak pricing allows retailers to take advantage of fluctuations in demand, increasing prices when demand is high or when competitors have low stocks. Uber is well known for doing this with its “Surge Pricing” when it increases the fare by a certain amount during peak travel times, thereby allowing them to capitalize on increased demand.
Conversely, off-peak pricing is the lowering of prices to incentivize customers to buy during times when demand is typically low. A good example of this is any after-Christmas sale. Typically people spend lots of money before Christmas, creating a lull in retail post-Christmas. Shops combat this by offering huge discounts in the days after Christmas. While their margins might be lower than normal, the idea is that they will make more money by implementing the sale than by sticking to normal prices.
9. Penetration Pricing
Penetration pricing is the practice of offering a low price for a new product or service during its initial offering in order to attract customers away from competitors.Often this price is lower than the eventual market price with the assumption being that gaining new customers will be worth it in the long run.
Remember, pricing is a team-based activity. Sales, marketing, buyers, financial analysts and product champions should work together in a co-ordinated way. Pricing goals will vary according to the stage reached in a product’s life cycle but they should not be separate from all the other processes.
Pricing in many companies is trapped between cost-based and customer-driven procedures that are often incompatible. Nagle & Holden observe that financial managers allocate costs to determine how high prices must be to cover costs and achieve profit objectives. Sales people analyse customers to calculate how low prices must go to achieve their sales objectives. Successful pricing implementation requires a company-wide perspective and understanding of the market, pricing objectives and product costs.
11. Always Sell Value
Customers will pay for benefits. Determine which services your customers find the most value in, and then focus on selling the benefits they provide. Instead of lowering prices, educate customers on the value of your services and why they’re worth the price tag. If you sell on value/benefits, you’ll make much more in the long run. Value speaks to something you alone bring to the table, or the pain relief or cost savings a customer enjoys as a result of employing your service.
12. Understand Your Ideal Customers
Ask people who fit your ‘ideal customer’ profiles value-based questions to determine how much is too much/too little. Analyse this data to determine price points and logical product/service bundles. Discover what those ideal customers value, and then create buyer personas to further flesh out what they want and how your product will eliminate key pain points.
Regularly review your customers as this will be your opportunity to demonstrate value. Test desired/new pricing strategies on a small set of customers to determine if they make sense for your business.
Establishing the correct price of your product or service is where your needs meet the customers' needs. The customer wants to see value in your product and you need to charge enough to keep the business afloat and profitable. It may be that you will try different scenarios to see which pricing changes can best help your business grow. Your pricing strategy should also involve constant refinement. What works today might not makes sense next year.
Take things up a notch by implementing a pricing management platform that can help you dynamically manage your business's pricing. Innoware's Price Management & Quotation Software will enable you to price smarter for increased profitability.
You May Also Like
- The Strategy and Tactics of Pricing, 2010, by Thomas Nagle and John Hogan
- Pricing with Confidence: 10 ways to stop leaving money on the table, 2014 by Reed K. Holden and Mark Burton
- Pricing Strategy: tactics and strategies for pricing with confidence, 2014, by Warren D. Hamilton